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Our biggest tax worries: the knowns and the great unknowns

Taxes will rise in April and consumers are concerned – these are the known rises. However, they also fear further hikes to IHT, capital gains and savings. Sarah Coles explains why.

biggest tax worries

New research has revealed that our biggest tax worries are the ones that the government might consider to balance the books post-pandemic and Brexit.

The vast majority of investors are agonising about tax hikes we know are coming in April, and how we’re going to cover the extra cost. But they’re not the only tax changes keeping us up at night – we’re also fretting about potential tax hikes the government could hit us with this spring.

And while we can’t be certain exactly what tax changes the government has in store, we can take steps to protect ourselves from the tax rises we know about and the ones we fear the most too.

The taxes we know about

The research found that the vast majority of us are worried about hikes in National Insurance and council tax. It’s hardly surprising they’re such a concern, because NI hits all working people under state pension age. Council tax, meanwhile, continues the slow and steady rise that has seen this tax increase by more than a quarter over the past decade (26%).

Dividend tax will hit fewer people, because the dividend allowance protects many smaller investors, and ISAs shelter investments from the tax entirely. However, those with larger portfolios outside ISAs and pensions, and people running their own businesses and paying themselves in dividends, are still vulnerable, which is why almost two in five investors are worried about the impact it could have.

There are some steps you can take to protect yourself. If your employer has a salary sacrifice scheme, you can give up some of your salary in favour of pension contributions. This won’t boost your take-home pay, but will cut your National Insurance bill. The best way to protect against dividend taxes, meanwhile, is to make sensible use of your ISA allowance, because any investments in an ISA are protected from dividend tax.

Biggest tax worries we don’t know about

Investors are also living in fear that the government could mount another tax attack. We don’t yet know whether the spring statement will evolve into a mini-budget, complete with the threat of possible tax changes. However, the taxes that investors will be watching most closely will be savings tax, capital gains tax and inheritance tax.

The personal savings allowance means that the first chunk of savings interest is tax-free (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers – additional rate taxpayers don’t have this allowance) so that an estimated 95% of people don’t pay tax on their savings at all. However, with rates set to rise over the coming year, a cut to the savings allowance could mean savers facing an unexpected tax bill.

The government asked the Office for Tax Simplification to look into changes to Capital Gains Tax, and while it has subsequently shelved any plans to change the way the tax is charged for now, it has brought some uneasiness, which is why almost a third of investors are worried it could rise in future.

This list wouldn’t be complete without inheritance tax, which emerged in our September research as the UK’s most hated tax. Although it’s paid by less than 4% of estates, and the tax-free allowance has actually risen over the past few years, the idea of being taxed again on everything after our death still rankles enough that almost a third of investors are concerned.

While we can’t second-guess what’s likely to happen in terms of tax in the immediate future, we do know that the tax environment is unlikely to get more generous – particularly for higher rate taxpayers. It means it’s worth thinking about using your allowances sensibly.

This includes your annual capital gains tax allowance and annual gift allowance for inheritance tax purposes. It also means thinking carefully about how to make the best use of your ISA and pension allowances.”

Sarah Coles is a senior personal finance analyst at wealth management firm, Hargreaves Lansdown.

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Last modified: February 2, 2022

Written by 3:04 pm News & Views